ARC's 1st Law: As a "progressive" online discussion grows longer, the probability of a nefarious reference to Karl Rove approaches one

Wednesday, November 30, 2005

Wired Magazine - How I learned to love George W Bush and higher oil prices

Sorry for the light posting, but had to focus on work non-stop for a few days. Apparently, my paycheck is completely unrelated to my efforts as part of this Rovian Conspiracy. Which reminds me, I really need to talk to "the Architect" and remind him that I need him to start kicking the conspirators here some payola, because while the Rovian robes are nice and the animal sacrifices are fun, it just doesn't beat actual compensation... But I digress...

While blogging from an undisclosed location, I noticed this cover on Wired Magazine. After reading the article, I found out that HIGHER OIL PRICES are GOOD for America and the energy industry, since higher oil prices makes alternative sources of energy more attractive:

So rising oil prices are more than just an irritant or even an ominous nick out of the GDP. They're an invitation to corn and coal and hydrogen. For anyone with a fresh idea, expensive oil is as good as a subsidy - with no political strings attached. Indeed, every extra penny you pay at the pump is an incentive for some aspiring energy mogul to find another fuel.

For the better part of a century, cheap oil has fatally undercut all comers, not to mention smothered high-minded campaigns for conservation, increased efficiency, and energy independence. But growing demand is outrunning the oil industry's carefully computed supply curves, bidding up long-term expectations for the price of energy. The long term may not mean a lot when you're standing at the pump, but the oil industry lives in a world where big projects take a decade to build and the checks that pay for them have eight or nine zeroes. Crude hit $70 a barrel last August, but oil companies have learned the hard way how quickly prices can crash. They adjust their expectations accordingly - downward.

For years, the industry's long-term benchmark was $20 a barrel in today's dollars; to get a green light, new investments needed to be profitable at that level. Now the industry is counting on prices to settle near $30. Some aggressive CEOs believe they'll stay as high as $40.

The changing outlook opens horizons - for conventional drilling, sure, but also for alternatives. Some new technologies merely produce more crude. But others tap energy supplies that have nothing to do with black pools under the Middle East.

Big Oil is already reaping the benefits of innovations developed in the 1990s, when long-term forecasts still pegged oil at $20 a barrel. Take digital oil fields - sensor-laden pumping operations under remote control - and ultradeep offshore platforms that drill beneath miles of water and rock to get at previously inaccessible deposits. But with the high end of long-term expectations hitting $40, novel energy sources are becoming attractive. Natural gas that used to be burned as an unwanted oil-field byproduct is being compressed into liquid fuel, and gooey tar sands are being shoveled out of the Canadian countryside to extract the embedded petroleum.

Push the long-term price forecast above $40, and more exotic possibilities come into play. Remember Jimmy Carter's synfuel program, which aimed to turn huge US coal reserves into gasoline? Three billion dollars in federal research money is now committed to making it happen. Corn, sugar, and soybean farmers hope rising prices can do what billions in subsidies and tax-funded research couldn't: make ethanol and biodiesel cost-effective. Smarter money is betting that using plant waste will prove more economical. These technologies join compressed natural gas, already widely used where it's worth spending extra money for cleaner exhaust.
So what's a price-shocked, carbon-afflicted highway jockey to do? Keep driving. In fact, drive more. The longer gas stays expensive, the higher the chance we'll see alternatives. Put that pedal to the metal. And smile when you see a big black $3 or $4 out in front at the gas pump. Those innovators need all the encouragement they can get. Shale oil, uranium, sunlight - there's enough energy out there for a dozen planets. Where we'll all park is another matter.

Surely, Wired gives credit for the increased gas prices to Bush, no? I mean, the guy's clearly at fault according to the mainstream press when the forces of supply & demand hit the oil market, so surely the Wired guys will applaud Bush for jacking up the price of oil, right?

Who am I kidding... but at least Wired admits that oil prices have nothing to do with who is the resident in the White House. It's very interesting to see that even they recognize that the primary reason for the increase in oil prices is not Bush or even the war in Iraq, but the expansion of the BRIC (Brazil, Russia, India, and China) economies, but also the problems with Hugo and Katrina.

And of course, there is truth to the argument that higher oil prices simply means that other, more expensive fuels become (relatively) less expensive. However, this is the broken window fallacy to some extent, from an economics standpoint:
The parable describes a shopkeeper whose window is broken by a little boy. Everyone sympathizes with the man whose window was broken, but pretty soon they start to suggest that the broken window makes work for the glazier, who will then buy bread, benefitting the baker, who will then buy shoes, benefitting the cobbler, etc. Finally, the onlookers conclude that the little boy was not guilty of vandalism; instead he was a public benefactor, creating economic benefits for everyone in town.

The fallacy of the onlookers' argument is that they considered the positive benefits of purchasing a new window, but they ignored the hidden costs to the shopkeeper and others. He was forced to spend his money on a new window, and therefore could not have spent it on something else. Perhaps he was going to buy bread, benefitting the baker, who would then have bought shoes, etc., but instead he was forced to buy a window. Instead of a window and bread, he had only a window. Or perhaps he would have bought a new shirt, benefitting the tailor; in that case the glazier's gain was the tailor's loss, and again the shopkeeper has only a window instead of a window and a shirt. The child did not bring any net benefit to the town. Instead, he made the town poorer by the value of one window.

So, when applied to oil prices, we need to take into account the other effects that high oil prices have than just the fact that other technologies become more attractive. The goal should be to allow these other fuel sources to become cheaper without regard to the price of oil.

Your Co-Conspirator,
ARC: St Wendeler

Comments (7)
Monterey John said...

St, how do you propose that other sources of energy become cheaper without consideration of oil prices? Hydrocarbons, particularly oil, are our primary source of BTUs. Alternative sources need to compete. They become more competitive as the price of oil rises. It's that old supply and demand thingie. :)

Once the alternate is play, then competition sets in for that source as producers seek to become more efficient and increase supply, which in turn impacts price. Again, same thingie.

Without regard to the market, which includes oil, nothing ain't happening.

St Wendeler said...

Well, my point is that it's better for alternative fuels to become more viable by becoming cheaper... compared to oil becoming more expensive.

ie, I want to see ethanol as an economically viable alternative at $1.80/gallon, not at $3.00/gallon.

Monterey John said...

I love a good debate!

You really are not buying oil, you are buying BTUs delivered by oil. So, what source of BTUs do you prefer,how much do you wish to pay for them and how many of them are available by what means? That is what determines the price.

Believe me, if someone could deliver equivalent BTUs using environmentally sound horse flop, they would be doing it by now.

Back to you saint :)

St Wendeler said...

I agree with you... they're not providing BTUs from other sources b/c they can't do it as cheaply....

But that's not a reason to cheer for higher gas prices.

Brian said...

Let me pick it up here. :-)

I don't care what form my "energy" (BTU's in your parlance MJ) comes from, I just want it cheap.

I think the Wired article makes a false argument, that we should wish for higher gas prices, because then alternatives are better researched.

Personally, I want to use up all the $1.80/gal of oil first, come back to me when its $3/gal, and tell me that shale oil energy is now best, and I'll buy that, but if I can get plain ol refined crude at $1.80/gal, im going that route.

And I'm not going to "wish" for higher prices for everybody just so research dollars are spent. The research will come when the oil runs out, which as the current price of oil demonstrates is a LOOONG way away.

Besides "the horse may sing" and we may not need some of the current technologies (bio-diesel and the like).

Monterey John said...

And the beat goes on...

No one is wishing for higher fuel prices. But one of the consequences of higher fuel prices is that people start looking for alternatives to whatever it is that they are currently using, in this case, primarily oil. That is the market place. That is simple economic reality, and to wish for something else is kind of futile. People will act when action is in their own best interests. There is nothing to get folks' attention like paying a fortune to keep houses at 60 degrees. Trust me, something will come of that and the sooner the better... whether the damn horse sings or not :)

Brian said...

I think we're arguing the same thing John.

I'm happy to hear about alternative fuels, I just don't seem to understand why people want alternative fuels when the ones we have work pretty damn well and are very economical (even when you figure in the "green" cost).